Materiality Is Broken. But It Doesn’t Have to Be.

In formulating strategy, shaping communications and improving their impact in the world, companies, and their sustainability teams, must answer two big questions: "What is important to our business?” and "What is important to our stakeholders?” (Sometimes as a proxy for the larger question: “What is important to the world?")

To do this, companies often turn to a materiality analysis — usually every two years — at a cost of tens of thousands of dollars (or, in some cases, over a hundred thousand dollars). But current approaches to materiality don’t provide the value they should or the insight that companies need. Though well-intentioned, they suffer from near-fatal flaws, and they don’t fully answer the questions posed above. In short: They are broken.

Here are a half-dozen of the serious holes in current materiality analysis:

Companies ask, “What is important to our stakeholders?” but that isn’t the right question. The question that really matters is, “What is important to the world?” While some companies consider what is important to their stakeholders as a proxy for what matters to the world, most don’t. For most, it’s limited to what it literally asks — what stakeholders say — and never addresses the broader question. This means the best case is when the things that are important to the selected stakeholders are also important to the world — and the living systems that undergird everything (the human economy and everything we hold dear). But without explicitly asking the question, “What is important to the world?”, that is far from guaranteed to be the case.

They have unnecessarily narrow timeframes, usually limited to the next 3-5 years at best. This leads to under-emphasizing or even completely missing issues that will pose much more of a problem outside that time frame. Case in point: climate change — which almost universally shows up in the wrong place on the materiality matrix. Climate change is an existential challenge for humanity, and yet it usually ends up somewhere in the middle or toward the left of the materiality matrix, not in the upper right where the top priorities are. This is because of the question that usually determines where something falls on the x-axis: “How important is this to the company in the next few years?” When limited to business impact in the next few years, climate change can seem as if it is not immediately critical (with a few industry exceptions, such as utilities and heavy emitters). But when every company rates it that way, it gets much less attention than it deserves, and the company ends up with a short-sighted view of what will challenge its future — its customers, its workers, its access to resources, the societies in which it operates. To put it bluntly: How good is a materiality assessment that misses the criticality of one of the most significant issues of our time?

They completely overlook ‘submerged value’ — the dozens of hidden, unmeasured secondary and tertiary economic gains from sustainable practice, such as customer vocality (willingness to talk to others about the company), employee loyalty and engagement, customer emotional connection, and the “clock speed” of innovation and operational improvement. These areas comprise a huge chunk of the business value created by sustainability (and a big portion of the entire enterprise value in most sectors). In Daniel’s work, he has found that submerged value normally represents around 80 percent of sustainability’s value contribution — or four times the apparent value.

They miss dependencies — domino effects that can radically change the answers to the question, “What should this company work on?” Many of these dominoes are not immediately obvious. For example, a standard materiality assessment may not uncover the connection between pharmaceutical donations and gender equity — or even suggest that such a connection exists. Yet a complete assessment would reveal that, “If someone needs to stay home to care for younger siblings or sick or infirm household members, this will most likely be a girl,” thus preventing her from going to school, and exacerbating gender inequity. In this case, drug donations promote equality by treating the infirm and making school possible for that girl.

And they miss time delays. Some issues have consequences that are years out but must be worked on far sooner than that. Delays are also frequently overlooked because materiality analyses don’t ask the right questions, such as the obvious: “How soon can our project achieve the desired results?”

While they are currently broken, materiality analyses are not beyond salvaging. They can be repaired so that they help companies find their focus and have far greater impact — and that is what we, and the world, need them to do.

To explore solutions to these issues, join us for the “Materiality Is Broken” session at the New Metrics '18 conference in Philadelphia, October 29th at 1:30 PM.

Daniel Aronson has been researching, writing, and consulting on the environment, social responsibility, and innovation for almost 20 years. During his consulting career, he has led sustainability strategy consulting for Deloitte and for IBM, and he has worked with companies… [Read more about Daniel Aronson]

Andrew Winston is a globally recognized expert on how companies can navigate and profit from the world’s biggest environmental and social challenges. His first book, Green to Gold, sold over 100,000 copies in seven languages. Inc Magazine included Green to… [Read more about Andrew Winston]

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